Federal Judge Puts Part of State Farm Katrina Settlement on Hold

By Andrew G. Simpson
January 27, 2007

The federal judge who must sign off on a proposed $50 million class action settlement involving State Farm's handling of Hurricane Katrina claims has said he needs lots more information before agreeing to the deal affecting as many as 35,000 policyholders.

U.S. District Judge L.T. Senter of the U.S. District Court of Southern Mississippi on Friday declined to approve the widely-reported settlement and did so "without prejudice," but he also made it clear that the parties have a lot of explaining to do.

"In the absence of substantially more information than I now have before me, I am unable to say, even preliminarily, that the proposed settlement establishes a procedure that is fair, just, balanced, or reasonable," wrote Judge Senter.

The ruling affects the proposed settlement of a class action on behalf of an estimated 35,000 State Farm claimants who did not sue the company. The agreement promises that their claims and any denials will be reconsidered.

A separate $80 million proposed settlement between State Farm involving some 640 cases already in litigation was not directly addressed in Senter's ruling on Friday and it is not clear whether or how that separate deal might be affected. Senter did strongly suggest that the $50 million class action settlement should be broadened to make room for people who may have already brought suit.

However, the leading plaintiff lawyers in the settlements, who have been operating under the name Scruggs Katrina Group, said they still plan to go forward next week with the initial payments to the hundreds of families they represent in the settlement apart from the proposed class.

As for the issues raised by Senter concerning the class action settlement, the lawyers said they were studying them. "It is our hope that the judge's concerns can be quickly addressed. Our efforts and attentions will be placed on satisfying his questions and requirements. The prospect of multi-year case by case litigation is in no one's best interest," the legal group said.

Wide-ranging criticism
Senter's wide-ranging criticism of the class action settlement raised concerns about everything from the plaintiff class and the monies involved to the blanket immunity granted the insurer, its agents and adjusters and the scope of the settlement.

Senter said he has not been given information to be able to gauge the adequacy of the $50 million that State Farm has pledged or "how thinly this large sum may be spread among the class members."

While $50 million is the minimum the class action deal coud cost State Farm, there is no cap.

Senter set forth numerous questions for the parties to answer. He wants to know why only total "slab" claims are guaranteed a minimum payment; why State Farm and all of its adjusters and agents are given a blanket protection from future suits without any compensation for the nullification of these potential claims; whether the proposed claims process gives State Farm too much control; and if the arbitration process is too restrictive.

He also criticized the plan as not being a truly global settlement because it does not do enough to include the clams of those who are currently engaged in litigation who may wish to opt-in to this settlement.

Miss. Attorney General
Mississippi Attorney General Jim Hood, who dropped his suit against State Farm as part of the deal and has called for the settlement to be a template for use by other insurers, said he had prior reservations about the administrative provisions in the settlement but had faith that Senter would make sure it is fair.

"Although it was contemplated that the federal court was better prepared to handle this type of process, our office did not negotiate the terms of the proposed federal court class action. In fact, our office had reservations about some of the terms of the class agreed to by the plaintiffs and State Farm.

"Nevertheless, I knew that Judge Senter would make sure that the class was a fair procedure for all. I am confident that Judge Senter will make the plaintiffs and State Farm fix the problems he has raised in his order, " Hood said in a statement.

5 claims categories
In the agreement, the types of losses sustained by the proposed class members (under 11 types of policies) have been divided into five basic categories as defined in a document called the Mississippi Katrina Resolution Guideline Tool (MKRGT):

• Foundation and pier only sites (slab cases) defined as the absence of structure on the site;

• Total/Constructive Total Damaged Structures defined as properties with damage to the insured structure equal to or greater than 60 percent of its insured value;

• Severe Damaged Structures defined as properties with damage to the insured structure between 30 percent and 60 percent of its insured value;

• Moderate Damaged Structures defined as properties with damage to the insured structure between 10 percent and 30 percent of its insured value; and

• Minor Damaged Structures defined as properties with damage to the insured structure equal to or less than 10 percent of its insured value.

Senter said the plaintiffs have not provided any information so he could determine the extent of claims and the extent of coverages for each of these five categories with any reasonable degree of certainty. Nor have the parties submitted any information concerning the face value or potential extent of the coverage held by the plaintiffs.

Guarantees and limits
The settlement guarantees a minimum recovery only for the first category of claims (slab cases), while making no guarantee of any minimum recovery to the other four categories of claims. Senter suggested that this is inadequate. "There is no evidence that State Farm will evaluate the class members' claims in any way different from the way these claims have already been evaluated by State Farm in the past adjustment process for these claims," he wrote.

The judge, who has handled all of Mississippi's federal Katrina-related lawsuits (including the recent Broussard case which whacked State Farm with $2.5 million in punitive damages), also suggested that the proposed agreement favors the insurer by imposing limits on class members' potential recoveries that may be inconsistent with his prior rulings. He said the plaintiffs have offered "no justification" for a provision that permits State Farm to take credit for payments made under a separate flood policy. To explain, he painted this scenario:

"Under the proposed agreement, the insured owner of a property worth $100,000 who insured the property against $50,000 in wind damage and $50,000 in flood damage, and who has collected his flood insurance benefits, would not be entitled to any recovery even if only a slab remained. In such a scenario, outside the proposed settlement agreement, an insurer would not be entitled to offset limits against limits, thereby depriving the insured of the benefit of the separate contracts the policyholder has purchased. The wind insurer would be entitled to a credit for the $50,000 in flood coverage collected, but that credit would be measured against the total value of the insured property, not the limits of the wind insurance policy."

State Farm control
He also suggested that the entire claims procedure contemplaed in the plan gives State Farm too much control. For one, the insurer is granted participation in the selection of the Special Master, a choice which Senter makes clear is "exclusively within the prerogative of the Court."

The proposed agreement also allows State Farm to train the arbitrators, control much of the administrative process, and control the compensation of all those involved in the administration of claims — all of which, Senter wrote, "has the potential of allowing State Farm to exert a substantial measure of control over the claims resolution process without oversight by any independent or neutral authority."

He noted that the deal requires that State Farm make a new offer of settlement but it establishes no criteria for what information will be considered in that offer beyond that which State Farm has already taken into consideration when it previously denied the claims.

The settlement has a provision allowing homeowners to opt-out of the settlement in order to pursue their own remedies, but the procedure "does not make opting out easy," Senter wrote in still another criticism.

Arbitration process
Senter also raised concerns about the arbitration process used if a claimant rejects State Farm's offer, as well as the selection and training of arbitrators.

"The arbitration procedure is limited to a maximum of two hours, and the decision of the arbitrator is final. There is no right of appeal, and there is no right of review with respect to the legal standards or evidentiary standards used by the arbitrator," he noted.

The judge said he needs information concerning the substance of the proposed training for arbitrators and about safeguards concerning potential conflicts of interest that may arise during the claims and arbitration process.

The proposed agreement contemplates minimum attorneys' fees for the class action lawyers of $10 million up to a maximum of $20 million but here again Senter said he has been given no information to judge whether this fee range is justified.

Broaden scope
The proposed class action addresses only claims that are not presently in litigation. There are provisions that would allow a State Farm policyholder who has filed a lawsuit to opt into the proposed claims procedure, but Senter said the terms are "unlikely to be attractive to many litigants." Thus, Senter urged the parties to expand the settlement to possibly include more of those who may be in litigation against State Farm:

"The problem of reaching a just, fair, and reasonable resolution of the property damage claims generated by Hurricane Katrina apply as much to the State Farm claims in litigation as to those claims which have not resulted in lawsuits. To be a true global settlement, any proposed arrangement should take all of the State Farm claims into consideration, and such a settlement agreement should represent a realistic compromise that both parties will find attractive. It would be wise for the parties who have proposed the current class settlement to broaden the scope of the settlement discussions to include the representatives of those parties currently engaged in litigation."